India Employment Law & Payroll: FAQs
Common questions on India's 2026 Labour Codes and what they change for companies running payroll or employing people in India.
What are the 4 new Labour Codes in India and when do they take effect?
India consolidated 29 separate Central Labour Acts into 4 unified codes - the Code on Wages, the Industrial Relations Code, the Occupational Safety, Health and Working Conditions Code, and the Code on Social Security - effective 21 November 2025, with the central government targeting April 1, 2026 for full operational parity across states (Ministry of Labour and Employment; state-level rule notification timing may vary).
What is the '50% Wage Rule' and how much will it raise payroll costs?
Under the standardized wage definition in the Code on Wages, if allowances and specified exclusions (HRA, conveyance, overtime, etc.) exceed 50% of an employee's total CTC, the excess amount is added back into the wage base used to calculate Provident Fund and Gratuity contributions. Since many companies previously kept basic pay low (25-35% of CTC) to minimize these liabilities, the change is estimated to raise statutory costs by 5-15% per employee (TopSource Worldwide, 2026).
What is the employer Provident Fund contribution rate under the new Code on Social Security?
Section 16 of the Code on Social Security, 2020 sets the employer's Provident Fund contribution at 10% of wages, matched equally by the employee, for establishments with 20 or more employees - though the appropriate government retains authority to notify a different rate for specified classes of establishments, so companies should confirm the applicable rate for their specific sector (Ministry of Labour and Employment Compliance Handbook).
How quickly must final wages be paid when an employee leaves?
Under Section 17 of the Code on Wages, an employer must pay all due wages within two working days of an employee's resignation, dismissal, retrenchment, or termination - a significant tightening from the prior norm where full-and-final settlements were often processed in the following month's payroll cycle. Gratuity, separately, must be paid within 30 days of becoming payable (Ministry of Labour and Employment).
Do fixed-term employees now qualify for gratuity in India?
Yes. Under Section 53 of the Code on Social Security, a fixed-term employee is entitled to gratuity on completion of their contract period after just one year of service, compared to the five years of continuous service generally required for other employees. Gratuity is calculated at 15 days' wages per completed year of service.
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